Market abuse regulation in the real economy

Since mid-2016, European Union regulations on preventing market abuse have applied not just for traditional financial instruments but also for a range of transactions in an industrial company's operational business.

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Since mid-2016, European Union regulations on preventing market abuse have applied not just for traditional financial instruments but also for a range of transactions in an industrial company's operational business.

Especially concerning the use of forward and spot commodity transactions, the Market Abuse Regulation, abbreviated to MAR [Regulation 2014/596/EU], contains new requirements. The ESMA has now issued new related guidelines on inside information concerning commodity contracts; these guidelines were published at the end of January. The guidelines provide indications both relating to information that must specifically be reported and to the scope of regulation overall.

Overview of the MAR regulations

As already known, with the European regulations on the prevention of market abuse being revised by the introduction of the Market Abuse Regulation, or MAR [Regulation 2014/596/EU], and the revision of the Market Abuse Directive II, or MAD II [Guideline 2014/57/EU], the scope of application was widened.

In conjunction with the Markets in Financial Instruments Directive (MiFID II), which was also revised, the following financial instruments are now governed by the MAR regulations:

Thus, a series of instruments or products falls under the scope of MAR, which has been expanded from the old market abuse guideline.

This means that companies or business units not previously affected by the regulation must now also meet the regulation's requirements as relevant financial instruments come under the scope of the regulation and/or trading activities are carried out on the exchanges concerned.

In this regard, the requirements of MAR can be outlined as follows:

Requirement relating to...

Description

Disclosure of inside information

Enabling the public to access information via specific platforms

Maintaining insider lists

Documenting corresponding persons and updating when changes arise

Prohibiting market manipulation

Strict prohibition accompanied by a list of sanctions

Measures to prevent and detect

the use of inside information

the disclosure of inside information

the recommending of actions based on inside

information

market abuse

This includes preventing

positions (buy or sell) being entered into based on inside information

information being deliberately disclosed to third parties

requesting third parties to enter into positions based on inside information

market abuse through technical means and operational arrangements for sensitive processes. Positions entered into that are not connected to the business

Measures to prevent managers carrying out transactions for own account

The measures to be taken by companies in this regard depend fundamentally on their function or role in the market.

In this way, for example, stricter and expanded requirements are placed on market operators or market makers. Nevertheless, the above regulations affect every entity who trades with financial instruments within the meaning of MAR and who is potentially in possession of inside information.

Definition of inside information for commodity contracts

The ESMA guidelines issued on 17 January 2017 [ESMA/2016/1480] set out what is to be understood as inside information in respect of commodity contracts now also falling under the scope of MAR.

The ESMA initially refers to the regulation of Article 7(1)(b) MAR. According to this, inside information is precise information not known to the public which, if known, would be likely to have a significant effect on the price of a commodity derivative or on the price of a directly related spot contract. The supplementary condition for commodity contracts in MAR stating that it must be information 'which is reasonably expected to be disclosed or is required to be disclosed in accordance with legal or regulatory provisions at the Union or national level, market rules, contract, practice or custom, on the relevant commodity derivatives markets or spot markets' is now made more specific through a precise definition issued by ESMA.

According to this, it shall be reasonably expected that information will be disclosed if:

it is widely accessible on a non-discriminatory basis after disclosure,

it is part of a public statement and not part of a private or personal opinion or analysis and

it is not a rumour or a speculative statement.

Following this general framework, the ESMA guideline develops a series of possible examples of inside information related to commodity contracts. This list is explicitly classified as not being exhaustive; it thus ought to be clear to the user after initial review that a case of inside information is realistic for almost all commodities. The ESMA's list includes market operators' obvious disclosure obligations in accordance with MiFID, statistical data of public institutions to non-financial data of private companies.

The latter includes:

Information on production, import, export and inventories of commodities upon which the commodity future or commodity spot contract is based (ESMA guidelines no. 21)

Information regarding changes in the conditions governing the storage of commodities (opening hours, fees, etc.), their load-in or load-out rate or more generally their capacity to process the commodity for storage and delivery, stock levels or movements of commodities in warehouses published in accordance with the practices of the respective market (ESMA guidelines no. 24).

For the most part, this information is not restricted to individual commodities; rather individual sectors such as energy and agriculture are only explicitly emphasised. Based on the open listing, however, it is clear that given the other requirements, metals, rare earth and all other commodities can be subsumed under the ESMA's examples and thus fall within the ESMA's scope.

Implications for the procurement and trading of commodities in industrial companies

The scope of MAR and the clarifications now provided for interpretation of inside information related to commodity contracts make clear that financial market regulation to prevent market abuse no longer concerns the mere issuance and trading of stocks or securitised debt instruments. Accordingly, all companies should take a series of precautions to ensure compliance with the requirements of MAR, including related to the trading of commodity contracts.

First, information available in the company must be analysed to establish to what extent it is inside information. The assessment will surely depend on the type of information and also on the relative significance for the commodity prices (e.g. based on the quantity of the commodities concerned). In this context, it must be borne in mind that secondary information (e.g. non-public information about supply shortages or changes in demand at business partners) falls under the category of inside information. In any case, it is necessary to ensure careful investigation and evaluation, and also to document these processes.

Furthermore, it is advisable to routinely identify (potential) insiders in the company, prepare corresponding insider lists and to instruct the employees concerned. The circle of insiders related to commodity contracts usually includes the employees in corporate treasury concerned with executing trades and, less often, employees in purchasing or sales. However, it is not possible to make a sweeping statement, since this ultimately depends on the specific individual case.

If further requirements apply for a company, e.g. as a commodity trader, it goes without saying that more extensive measures must be taken to avoid market abuse in the company.

In summary, it can be concluded that the ESMA guidelines on commodity contracts under MAR help to achieve more clarity on the specific cases of application for industry. At the same time, however, it must also be stressed that regrettably the regulatory requirements placed on industry have not been lessened in the process.